Equities reach sell-by heights, Russell

Investors should favour selling the upswings rather than buying the lows in equity markets, according to the latest Russell Investments analysis.

The Russell Quarterly Global Outlook for the June 2016 quarter says with share market sentiment turning negative since late last year, investors need to review their strategies.

“For example, the S&P500 had a strong upward trend from 2012 to 2015. This made it relatively easy to ‘buy the dips’, particularly when combined with a positive business cycle outlook,” the Russell report says. “Now, however, price momentum has turned negative and the US business cycle is at best neutral for the equity market. Under these circumstances, we think it’s better to ‘sell the rallies’ than chase the market higher.”

Based on its “cycle, value and sentiment investment strategy process”, Russell has downgraded the prospects for global equities to low single-digit returns compared to high single-digits in its previous quarterly outlook.

“The process is telling us that business-cycle support for equities is weakening as the corporate profit outlook softens, the Fed continues tightening, and the Bank of Japan and the European Central Bank reach the limits of additional policies support,” the Russell analysis says.

Despite the overall downbeat prospects for global equities, Russell says European shares still offer value after “being unfairly penalised in the market pull-backs”.

“Eurozone equities should be solid outperformers during market rebounds,” the report says, regardless of an economic background less supportive of shares than a few months previously.

Graham Harman, Sydney-based Russell senior investment strategist, says while the Asia-Pacific region should “remain a modest performer” over the quarter, there was cause for optimism in some countries.

“Among the bright spots in the region are India, which is growing strongly, and Australia and New Zealand, where the property markets remain surprisingly well-behaved,” the Russell study says. “Japan is more downbeat, but is still growing a little ahead of stall speed. China is the big unknown, but in the light of resolute monetary and fiscal stimulus, a soft landing remains our central case.”

With low-to-negative yields on offer from sovereign bonds globally, Russell also remains cautious on the defensive asset class.

“But, as the cycle is becoming less favourable for equities, it is becoming a bit less unfavourable for government bonds,” the report says.

“… And our sentiment indicators score government bonds as overbought after the recent rally. The combination of cycle, value and sentiment considerations keeps us negative on US government bonds. The softer business cycle outlook, however, is making us less negative.”

According to Russell, the growing divergence between the US and the rest of the world is the underlying trend “driving market volatility”.